US fiscal cliff looms ever closer

Mon, Dec 31, 2012, 00:00

The US Congress returns today without a deal to avert the "fiscal cliff" and only a few hours of actual legislative time scheduled in which to act if an agreement materialises.

Unless an agreement is reached and approved by the start of New Year’s Day, more than $600 billion in 2013 tax increases will begin to take effect and $109 billion will be carved from defence and domestic programmes.

Negotiations involving vice president Joe Biden and Senate Republican leader Mitch McConnell appeared to offer the last hope for avoiding the across-the-board tax increases and draconian cuts in the federal budget that will be triggered at the start of the New Year because of a deficit-reduction law enacted in August, 2011.

Democratic and Republican leaders in the Senate had hoped to clear the way for swift action yesterday. But with the two sides still at loggerheads in talks, Senate Democratic leader Harry Reid postponed any possible votes and the Senate adjourned until today.

“There is still significant distance between the two sides, but negotiations continue,” Mr Reid said shortly before the Senate ended its rare Sunday session yesterday. “There is still time to reach an agreement, and we intend to continue negotiations.”

In an interview broadcast yesterday, President Barack Obama said he was optimistic Congress would avert the automatic tax rises and spending cuts that are due to start in January without a deal. But he also attacked Republicans for their “overriding” priority of protecting the incomes of the wealthy in negotiations and vowed to press his plan for higher rates if Congress failed to reach agreement in coming days.

The US faces the fiscal cliff because tax rate cuts enacted in 2001 and 2003 during President George W Bush’s administration expire at midnight.

The pending across-the-board reductions in government spending, which will slice money out of everything from social programmes to the military, were put in place last year as an incentive to both parties to find ways to cut spending. That solution grew out of the two parties’ inability in 2011 to agree to a grand bargain that would have taken a big bite out of the deficit.

In a move that was sure to irritate Republicans, Mr Reid was planning to force a Senate vote on Mr Obama’s campaign-season proposal to continue expiring tax cuts for all but those with income exceeding $200,000 for individuals and $250,000 for couples.

Attached to the measure - which the Republicans seemed likely to block - would be an extension of jobless benefits for around two million long-term unemployed people. 

Hopes for a "grand bargain" of deficit-reduction measures vanished weeks ago as talks stalled.

While Congress has the capacity to move swiftly when motivated, the leaders of the House of Representatives and the Senate have left themselves little time for what could be a complicated day of procedural manoeuvring in the event of an agreement.

House Speaker John Boehner has insisted that the Senate act first, but that chamber does not begin legislative business until lunchtime.

The cliff is not the only business on the House agenda. Farm-state lawmakers are seeking a one-year extension of the expiring US farm law to head off a possible doubling of retail milk prices to $7 or more a gallon in early 2013.

Relief for victims of Superstorm Sandy is waiting in line in the House as well, though it could still consider a Senate bill on assistance for the storm until Wednesday, the last day of the Congress that was elected in November 2010.

Expiring along with low tax rates at midnight are a raft of other tax measures effecting tens of millions of Americans. A payroll tax holiday Americans have enjoyed for two years looks like the most certain casualty as neither Republicans or Democrats have shown much interest in continuing it, in part because the tax funds the Social Security retirement program.

The current 4.2 per cent payroll tax rate paid by about 160 million workers will revert to the previous 6.2 per cent rate after December 31st, and will be the most immediate hit to taxpayers.

A "patch" for the Alternative Minimum Tax that would prevent millions of middle-class Americans from being taxed as if they were rich, could go over the cliff as well. Both Republicans and Democrats support doing another patch, but have not approved one. At best, the Internal Revenue Service has warned that as many as 100 million taxpayers could face refund delays without an AMT fix. At worst, they could face higher taxes unless Congress comes back with a retroactive fix.

After tomorrow, Congress could move for retroactive relief on any or all of the tax and spending issues. But that would require compromises that Republicans and Democrats have been unwilling to make so far.

Mr Obama said yesterday he plans on pushing legislation as soon as Thursday to reverse the tax hikes for all but the wealthy.


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